HRA Options

Health Reimbursement Arrangements Benefit Options

HRAs give the employers vast design options to set up benefits to specifically meet the needs of the employer and the employee. As an administrator, you need to know the plan design potentials before you can recommend the optimal plan design.

What are the plan design options for participants?

Participants can be limited to certain classes of employees (such as factory workers or office staff) if doing so does not violate the Code § 105(h) nondiscrimination rules. Participants can also include retirees.

What are the plan design options for employer contributions?

Since HRAs are not subject to the FSA Uniform Coverage rule, the employee cannot be reimbursed for more than the employer has contributed to date less any previously reimbursed expenses (unless the employee has accumulated carry-over funds available).

However, if the employer makes an annual contribution, the entire amount is available for reimbursement as of the first day of the plan year. The employer risk can be reduced by setting up multiple contribution periods. For instance, the employer can choose to contribute monthly or quarterly. If the employer elects to contribute quarterly, only 25 percent will become available each quarter.

The problem is to balance the needs of the employer with the needs of the employee. The following scenario will illustrate this. (In this example, it is a new HRA and the employees do not have any accumulated carry-over funds.)

Employers choose to set up an HRA for $1,200
Contributions will be made monthly—$100 a month.
On the first day of the plan year, $100 is available for reimbursement of eligible expenses.
Employee A incurs an expense of $1,000 in the first month, and submits a claim for reimbursement.
Since there is only $100 available, Employee A receives a reimbursement of $100 followed by $100 each month until the full amount is reimbursed.

Result: The employee has out-of-pocket expenses until the tenth month unless he terminates employment before then. If he terminates employment, he cannot receive any more than the employer has contributed before the termination date.

What are the plan design options for eligible expenses?

The HRA can be designed to reimburse only certain of the expenses eligible under an HRA. For instance, a linked HRA can be set up to pay only coinsurance, co-pays, and deductibles.

What are the plan design options for the date the expenses were incurred?

The regulations allow eligible expenses incurred in a previous coverage period to be reimbursed if the employee was a participant at that time. The employer needs to decide how to handle the following situations:

A participant submits a claim for expenses incurred during a previous coverage period. (The employee was a participant at that time.) Does the employer want to allow this to occur or not?
A participant submitted a claim last coverage period, but there were not sufficient funds for the entire claim to be reimbursed. Does the employer want the remainder of that claim to be reimbursed out of the current year's funds?

What are the plan design options for eligible dependents?

The HRA can be designed to reimburse only the eligible expenses of the employee and not the dependents. (This is rarely done, and then it usually applies to wellness benefits).

What are the plan design options for carry-over of unused funds?

First, it is not required for unused funds to be carried forward. However, if the employer wishes to allow the carryover of unused funds, the following parameters can be set:

Percentage - The percentage of the unused funds during the previous coverage period that can be converted into carry-over funds.
Cap - The maximum amount of carry-over funds that an employee can have at one time.

What are the plan design options for the spend-down feature?

The first decision to make is whether the employer wants to provide the spend-down feature. This option can be set for each HRA.

If the spend-down feature is offered when eligibility is loss, the employer needs to decide which events can be chosen to trigger the feature. For instance, the following events can trigger spend-down being offered to the participant.

Termination of employment
Disability
Death
Retirement
Loss of Eligibility without Loss of Employment
USERRA Leave exceeding 31 days

Then for each event, the following decisions need to be made:

Conversion Percentage - The percentage of the accumulated funds that can be converted into spend-down funds
Cap - The maximum amount (if any) of accumulated funds that can be converted into spend-down funds.
Coverage Period - The length of time the employee has to draw down the spend-down funds.

What are the plan design options for ordering the HRA and the FSA?

Under Code § 125, the FSA cannot reimburse an expense that is reimbursed or reimbursable from another source. However, if offered with an HRA, Health FSAs can be required to pay first if both of the following conditions are met:

The HRA plan sponsor chooses, before the beginning of the plan year, to have Health FSAs pay first
Both the HRA and FSA Plan Documents so state.